What Are Penny Stocks? How I Think About Small-Cap Public Companies

I’ve had a funny relationship with the term penny stocks for years. I wrote a book called The Penny Stocks Bible. Later I renamed it Navigating Penny Stocks. So clearly I’m not afraid of the term.

But I also think it can make people look at this market the wrong way.

Say “penny stock” and a lot of people immediately picture something cheap, promotional and wildly speculative. Sometimes that description is deserved. Sometimes it completely misses what the company actually is.

I’d rather start underneath the ticker.

Cheap share price does not tell me much

A stock trading at 20 cents can be expensive. A stock trading at $20 can be cheap. The share price alone tells me almost nothing about the value of the company.

I want the market capitalization, shares outstanding, cash, debt, warrants and options, project, people and what the company is trying to accomplish. That is why I generally prefer the language of small caps, microcaps and public ventures. It points me toward the company rather than the price of one share.

The attraction is the blue sky

Small things can become much bigger things. A company valued at $10 million doesn’t need to become one of the largest companies in the world to create a meaningful multiple in value. It needs to prove enough of its thesis for the market to value it differently.

That possibility is exciting. It is also exactly why the risk is high. The thesis may fail. The company may not finance itself. Management may disappoint. The project may not work. The structure may become so diluted that even a good project produces a poor outcome for early shareholders.

Blue sky and risk live together.

I want to know what happens next

I’m not asking only whether I like the story. I want the next value-creating event. If it is exploration, what are they drilling and what would a meaningful result look like? If it is technology, what adoption or revenue milestone matters? If it is an acquisition story, what transaction changes the scale?

Then I work backward. Does the company have the money to get there? Can the team execute? What does the share structure look like? What is already priced in?

That is more useful to me than simply looking for the cheapest stock on the screen.

Start with my guide to Public Venture Capital, then continue with How I Evaluate a Small-Cap Public Company. For the chart and execution side, see How I Think About Trading.

This article is educational and reflects my personal experience and opinions. Small-cap securities can be highly speculative and volatile. Nothing here is investment advice.